EGBs-GILTS CASH CLOSE: Bunds Underperform As The ECB Strikes Back

European curves flattened with Bunds weakening and Gilts strengthening Thursday, as hawkish ECB commentary contrasted with a slightly softer tone from the BOE.

• ECB's Knot and, to a lesser extent, Lagarde pushed back against recent speculation that the Gov Council would downshift to 25bp hikes by March.
• The hawkish tone was heightened by December meeting accounts showing a "large number" of officials sought a 75bp hike (vs the actual 50bp).
• Comments on inflation by BOE Gov Bailey ("will fall quite rapidly this year") were a reiteration of the bank's November forecasts, but the subsequent headline saw UK rates briefly rally. Separately, the BOE's quarterly credit conditions survey also showed banks were the most pessimistic they'd been on household lending since 2007.
• Periphery spreads compressed slightly on the day.
• Attention early Friday is on UK retail sales data, while ECB's Lagarde speaks later in the morning.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 6.5bps at 2.528%, 5-Yr is up 6.3bps at 2.124%, 10-Yr is up 4.2bps at 2.065%, and 30-Yr is up 0.9bps at 1.998%.
• UK: The 2-Yr yield is down 4.1bps at 3.454%, 5-Yr is down 2.6bps at 3.237%, 10-Yr is down 3.9bps at 3.275%, and 30-Yr is down 6.1bps at 3.612%.
• Italian BTP spread down 2.8bps at 171bps / Spanish down 1.3bps at 92.7bps